Problem 8-23 Schedule of Expected Cash Collections; Cash Budget [LO8-2, LO8-8] The president of the retailer Prime Products has just approached the company’s bank with a request for a $51,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used: On April 1, the start of the loan period, the cash balance will be $24,400. Accounts receivable on April 1 will total $151,200, of which $129,600 will be collected during April and $17,280 will be collected during May. The remainder will be uncollectible. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow: April May June Sales (all on account) $ 285,000 $ 548,000 $ 251,000 Merchandise purchases $ 194,000 $ 179,000 $ 171,000 Payroll $ 35,400 $ 35,400 $ 19,900 Lease payments $ 35,800 $ 35,800 $ 35,800 Advertising $ 64,400 $ 64,400 $ 40,400 Equipment purchases − − $ 68,500 Depreciation $ 19,400 $ 19,400 $ 19,400 Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $141,500. In preparing the cash budget, assume that the $51,000 loan will be made in April and repaid in June. Interest on the loan will total $860. Required: 1. Calculate the expected cash collections for April, May, and June, and for the three months in total. 2. Prepare a cash budget, by month and in total, for the three-month period.

Introduction Cash budget: Cash budget is an estimate of cash receipts and cash payments for a future certain period of time. It is prepared for a year or 6 months. It is an analysis of flow of cash during a given period of time. Company can control and effectively use cash. Any excess or underutilization of cash is properly managed by the company. It consists of opening balance and adds all cash receipts and deducts all cash payments to arrive at balance of cash.Closing balance of January becomes opening balance of February and same rule of closing balance of previous month applies to opening balance of next month. 1. Expected cash collections from April to June: particulars April $ May $ June $ Cash sales collected 30% on month of sale April = [$285,000 *30%] May = [$548,000 * 30%] June = [$251,000 * 30%] $85,500 $164,400 $75,300 Cash sales collected 60% on following month of sale April = [$285,000 *60%] May = [$548,000 * 60%] $171,000 $328,800 Cash sales collected 8% on second following month of sale April = [$285,000 *8%] $22,800 Add: loan $51,000 Total cash estimated collections $136,500 $335,400 $426,900 2. Cash budget for the period April to June: particulars April $ May $ June $ Opening balance on 1st April $24,400 $13,400 $36,480 Receipts: Cash sales collected 30% on month of sale [calculated in table 1] $85,500 $164,400 $75,300 Cash sales collected 60% on following month of sale [calculated in table 1] $171,000 $328,800 Cash sales collected 8% on second following month of sale [calculated in table 1] $22,800 Add: accounts receivable $129,600 $17,280 Add: loan $51,000 Total [a] $290,500 $366,080 $463,380 Less: cash payments: Merchandise purchases $141,500 $194,000 $179,000 [+] payroll $35,400 $35,400 $19,900 [+] lease payments $35,800 $35,800 $35,800 [+]advertising $64,400 $64,400 $40,400 [+]equipment purchases $68,500 [+] loan repayment with interest $51,860 Total [b] $277,100 $329,600 $395,460 Closing balance [c] = [a] - [b] $13,400 $36,480 $67,920

Answered: Problem 8-23 Schedule of Expected Cash Collections; Cash Budget [LO8-2, LO8-8] The president of the retailer Prime Products has just approached the company’s…

FINANCIAL ACCOUNTING

10th Edition

ISBN: 9781259964947

Author: Libby

Publisher: MCG

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Question

Problem 8-23 Schedule of Expected Cash Collections; Cash Budget [LO8-2, LO8-8]

The president of the retailer Prime Products has just approached the company’s bank with a request for a $51,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:

On April 1, the start of the loan period, the cash balance will be $24,400. Accounts receivable on April 1 will total $151,200, of which $129,600 will be collected during April and $17,280 will be collected during May. The remainder will be uncollectible.
Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

	April	May	June
Sales (all on account)	$	285,000	$	548,000	$	251,000
Merchandise purchases	$	194,000	$	179,000	$	171,000
Payroll	$	35,400	$	35,400	$	19,900
Lease payments	$	35,800	$	35,800	$	35,800
Advertising	$	64,400	$	64,400	$	40,400
Equipment purchases		−		−	$	68,500
Depreciation	$	19,400	$	19,400	$	19,400

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $141,500.
In preparing the cash budget, assume that the $51,000 loan will be made in April and repaid in June. Interest on the loan will total $860.

Required:

1. Calculate the expected cash collections for April, May, and June, and for the three months in total.

2. Prepare a cash budget, by month and in total, for the three-month period.

Expert Solution